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Saturday, October 26, 2013

Mark Spitznagel runs the multi billion dollar hedge fund Universa Investments and made a name for himself after correctly predicting the 2000 and 2008 stock market crashes. While the S&P 500 lost 33% during 2008, his fund was up over 100%. During the summer of 2011 Spitznagel predicted a 20% decline in stocks which arrived just a few weeks later.

He sat down with CNBC this week to discuss the distortions that exist in the market today and the decline he sees coming in stocks. His advice for investors: get out of the way now.

Friday, October 25, 2013

Just a quick visual walk through today on the euphoria/danger that currently exists in the U.S. stock market before you get back to the mainstream news and every person around you who will provide a steady stream of reasons why stocks are undervalued and headed much higher.

The following chart from Bespoke shows that the bears have officially left the building. Even if someone wants to proclaim they are not bullish, at this point in the rally no one will dare say that they believe stocks could actually fall. Click for larger image:

This helps provide context on where we are in the investor psychology cycle. The charts below from Street Talk Live map it out:

Now we can layer this understanding on the ebbs and flows of the secular bear market over the past 18 years:

At the end of a secular bear market rally the public re-enters the stock market, finally believing that stocks will rise forever and forgetting how they were slaughtered the last time.

Meanwhile on Wall Street they are not only all in, they are fully laced with margin.

Where will U.S. stocks go in today's trading session? Probably higher.

Where will they go in Monday's trading session? Probably higher.

Stocks becoming more expensive and overvalued in relation to their underlying fundamentals only makes those in the market more excited to purchase. This simple psychological flaw that people possess is how the few that understand this have made the lion's share of the profit in the market over time.

Thursday, October 24, 2013

The big bank and government relationship in the United States has become so grossly incestuous that I barely discuss it any more on this site. I would hope by now that people understand the simple process that makes up our banking system:

As asset prices move higher banks take on more and more leverage locking in profits from the asset price appreciation. These profits are paid out in the form of large salaries and bonuses to management and traders throughout the company.

On the way down, these assets collapse and the banks face major losses. The government (American tax payers) step in and pay for those losses.

Heads they win and tails we lose. Very simple.

Before 2008, the American people felt some benefit of this process because banks provided loans in the form of mortgages, small business loans and consumer credit.

This is no longer the case today. Banks now receive the printed money from the Federal Reserve and they immediately return that freshly printed money to the Federal Reserve's depositary account where it earns them a risk free 0.25% return. The excess reserves then provide a capital base for the large bank's trading and margins accounts, allowing them to gamble in the paper market casinos (stocks, bonds, derivatives and currencies). They have made tremendous profits gambling while asset prices have risen since 2009.

This circular process now cuts the American people completely out of the loop. Those that are closest to the QE flow receive the benefits. The rest see no improvement in the job market or their income levels while their costs of living rise.

Fortunately for the United States government and the big banks, the vast majority of the American public has no understanding of what is happening behind the scenes. They have been bought off with social transfer payments, told there was no longer a need to work or worry, and put in front of the television to watch Miley Cyrus, The Housewives Of Orange County and sporting events.

The bread and circuses from the Roman era has returned and history has repeated again as it always does.

I discuss this now because when the good times end again, as they always do, and these artificially propped up asset prices once again meet gravity combined with reality there is going to be a tremendous anger that returns across the country. Those that have not been paying attention (almost everyone) will demand to know what happened and begin calling for people's heads (as they were in the fall of 2008).

Many involved in this circular wealth transfer understand that this is coming and have packed their bags to remove themselves from the eyes and minds of the public. Others have stayed, believing perhaps they are god like and deserve the money they are stealing from the public. They spend as much time in front of the camera as possible, and the mainstream media once again glorifies them.

It is a system that now breeds and is led by sociopaths. While the American people worry that the country could someday enter a communist/socialist type state, they do not realize that we have already past that point and now represent a fascist state run by the largest banks.

Monday, October 21, 2013

"The Fed has boxed itself into a position where there is no exit strategy."

Delving further into the details we can see how this artificial rate environment is creating a blinding effect on investors everywhere.

Nestle recently issued a 4 year bond at 0.75%, an all-time record low yield for a corporate bond. Historically, corporate bond yields have ranged in the 4% to 10% range. Imagine if that bond issuance came in at a bid of 5%. What would that do for the profit projection over the next four years for Nestle? Instead of paying 5% (cutting into to profits) to grow their global organization they are essentially getting free money!

This is what the stock market has priced in. Free money always being available to send corporate profits higher. Low interest rates forever.

Since the taper was mentioned in May of this year the 10 year U.S. bond yield rose from 1.7% to 3% before backing off to 2.6% where it is today. The 10 year yield is the benchmark for how mortgage rates are determined (10 year yield + investor spread = mortgage rates).

The following chart shows that mortgage rates hovered at a record low trend line for a long period before rising substantially and "resetting" at the new higher level.

What has this done to the housing market? Affordability has now fallen to a five year low. Higher interest rates + higher home prices = lower affordability (due to higher monthly payments).

The stock market has priced in U.S. home prices surging higher years into the future based on low interest rates forever.

Subprime auto loans are back, creating an artificial floor under the automobile sales industry. The following shows the percentage of auto dealers reporting that financing is hard to get.

The total? 0%!

The stock market has priced in a renaissance in auto sales trending out years into the future based on low interest rates forever.

Margin borrowing (borrowing money to buy stocks) has hit a new all time record high. Sam Stovall, the chief equity strategist at S&P Capital IQ summed up this concerning growth perfectly; "If somebody is willing to borrow money to invest in stocks, they have a very high confidence level. And if everybody's optimistic, who's left to buy?"

The stock market has priced this margin debt growth rising forever.

Taking the black line below around for a spin shows the perfect world the Fed (and other central banks around the world) have created, unless of course they ever have to slow down purchases

I use the Fed and the U.S. as an example but euphoria has spread like an virus outbreak around the world. In combination with the Fed, the Bank of England and the Bank of Japan are unleashing a relentless spray of QE-ternity liquidity into the markets. Money moves freely around the world in today's liquid markets and asset bubbles are appearing everywhere. U.K. real estate prices are now rising 10% a month while real estate in China is now rising at 12% a week based on the most recent sales data.

Stock markets in Europe are surging as bond yields continue to fall in bankrupt nations. Just the promise of unlimited money printing from the European Central Bank has sent the entire region into a delusional frenzy.

What has been lost during this unbelievable global asset price surge is actual growth in the economies these asset prices are located in (as Faber discusses below). The world is approaching stall speed. Jobs have not appeared during this asset price resurgence. The wealthy see their portfolio values rise by the hour as the "rest" run on a treadmill that is breaking down.

Central banks around the world have found themselves in the perfect sweet spot. We are currently in the eye of the storm and historians will look back and wonder how so many could be blindly fooled by a wave of printed money and an ocean of toxic debt.

This is not the time to lose one's reason. As assets move further into the stratosphere of the absurd, your portfolio should look more like an Armageddon bomb shelter; walled by the safest forms of cash surrounding a nest of physical precious metals. Do not get sucked into the madness and chase yields of bubbly toxic assets. If a picture speaks a thousand words, I hope I can stop here and let the following graph do the talking:

More from Marc Faber this morning, one of the most successful investors of our time.

"We should be careful to get out of an experience only the wisdom that is in it and stop there lest we be like the cat that sits down on a hot stove lid. She will never sit down on a hot stove lid again and but she will never sit down on a cold one either."

- Mark Twain

"It's waiting that helps you as an investor, and a lot of people just can't stand to wait."

- Charlie Munger

"Live as if you were to die tomorrow. Learn as if you were to live forever."

- Gandhi

"One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I wait for a situation that is like the proverbial shooting fish in a barrel."

- Jim Rogers

"Capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich."

- James Grant

"At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."

- Ben Bernanke, March 2007

"Everything that needs to be said has already been said. But since no one was listening, everything must be said again."

- Andre Gide

"When people are getting richer and richer but they're not actually producing anything, it can't end well."

- Louis CK

"In economics things take longer to happen than you think they will, and then they happen faster than you thought they could."

- Rudiger Dornbusch

"I don't write about what I know. I write to find out what I know."

- Patricia Hampl

"Chains of habit are too light to be felt until they are too heavy to be broken."

- Warren Buffett

"Everyone has a plan until they get punched in the mouth."

- Mike Tyson

"Interest on the debt grows without rain."

- Yiddish Proverb

"You can have comfort, or you can have value. You cannot have both."

- Jim Grant

"Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."

- Warren Buffett

"No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future."

- Ludwig von Mises

"Men who can both be right and sit tight are uncommon."

- Jesse Livermore

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

-Ludwig von Mises

"Most investors think quality, as opposed to price, is the determinant of whether something's risky. But high quality assets can be risky, and low quality assets can be safe. It's just a matter of the price paid for them."

- Howard Marks

"Whenever you find yourself on the side of the majority, it is time to pause and reflect."

-Mark Twain

"None are more hopelessly enslaved than those that falsely believe they are free."

-Goethe

"The longer the markets disobey basic rules of valuation, the bigger the opportunity for good investors to reap the benefits. Value investing works precisely because markets become dysfunctional at times."

-John Coumarianos

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.

-Sir John Templeton

"No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future."

- Ludwig von Mises

"People only accept change in necessity and see necessity only in crisis."

-Jean Monnet

Requiring a central bank to print money to increase government's purchasing power invariably ignites a hyperinflationary firestorm. The result through history has been toppled governments and severe threats to societal stability.

- Alan Greenspan

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

- Henry Ford

"Do you want to sell sugared water for the rest of your life? Or do you want to come with me and change the world?"

-Steve Jobs

"I'd be a bum on the street with a tin cup if the markets were always efficient."

-Warren Buffett

"The market can stay irrational longer than the investor can stay solvent."

- Keynes

"While the government struggles to save one crumbling enterprise at the expense of the crumbling of another, it accelerates the process of juggling debts, switching losses, piling loans on loans, mortgaging the future and the future's future. As things grow worse, the government protects itself not by contracting this process, but by expanding it."

-Ayn Rand, 1974

"The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function."

- F. Scott Fitzgerald

"All our life, so far as it has definite form, is but a mass of habits - practical, emotional, and intellectual - systemically organized for our weal or woe, and bearing us irresistibly toward our destiny, whatever the latter may be."

-William James

"Men it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

-Charles Mackay

The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.

- Stephen Hawkings

"Give me control of a nations money supply, and I care not who makes it's laws."

- Amschel Rothchild

Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces.

- Sigmund Freud

Many of life's failures are people who did not realize how close they were to success when they gave up.